US Stocks Spurred By Slowdown In Job Losses

PeterA. McKay

A slowdown in the pace of U.S. job losses was enough to spur a rally in U.S. stocks Friday, though some participants remained wary about the timing of a possible economic recovery.

Bank stocks were a bright spot after the government said late on Thursday that 10 of 19 banks need a total of $74.6 billion in additional capital following a round of stress tests. That fell short of the worst case that investors had feared.

At 12:15 p.m. EDT, the Dow Jones Industrial Average was up 132 points, just off its intraday high, bolstered by gains for financial stocks like American Express, which gained more than 6% after it came through the stress tests without being told to raise capital. Chevron rose more than 3% and Exxon Mobil rose by more than 2% as crude oil topped $57 a barrel.

However, tech stocks including Intel and International Business Machines were down more than 2%, pressuring the broader index. Home Depot also fell, dropping by about 2%, as the jobs report showed that headwinds remain for consumers.

The tech-heavy Nasdaq Composite Index was up 0.8%, and the S&P 500 was up 1.8%. All its sectors traded higher, led by financials, energy, and industrials.

Investors focused on the Labor Department's release of new data on nonfarm payrolls, which fell 539,000 in April, better than the mean expectation for a 610,000 decline.

Though the headline payrolls number was not as bad as many feared it would be, the report painted a stark picture of an economy that is still shedding jobs at an historic clip, bringing the total number of job losses since the recession started in December 2007 to 5.7 million.

"It's not clear to me why this market should continue to rally [from its March lows] based on the fundamentals," including the latest jobs report, said Russ Koesterich, portfolio manager at Barclays Global Investors in San Francisco. "We may get the S&P up to 950 or 1000 in the short run, but probably not much beyond that, especially when you consider the market isn't so cheap anymore."

Mr. Koesterich said he is placing some early bets on a U.S. recovery, but unlike many participants in this spring's stock rally, he's not piling into consumer-related names to do it. He's concerned that continued job losses - of any size - will crimp everyday Americans' spending for some time to come, especially in light of heavy household debt loads that will take a few years to wind down.

Instead, Mr. Koesterich has favored investment in commodity-related stocks, especially in resource-rich countries like Canada and Australia likely to benefit from early spending by businesses to ramp up production in the early stages of a global rebound.

Other money managers are even more cautious.

"What's happening on Wall Street these days isn't necessarily lining up with what's going on in the domestic economy," said portfolio manager Matthew Smith, of Smith Affiliated Capital, which for now continues to favor Treasury bonds and other forms of low-risk debt over stocks.

Mr. Smith was skeptical of the stress-test results, which he believes were based upon some faulty assumptions by regulators.

"They started out assuming there are no truly toxic assets at these banks, just misunderstood assets that will gain value as the market gets back to normal," he said. "I don't see why we should believe that."

That view was in the minority on Friday, however, as stocks rallied. The S&P 500's financial sector was up almost 3%.

Wells Fargo and Morgan Stanley, two banks that sold shares to raise capital under the government's orders, were mixed Friday. Wells Fargo was up 2% and Morgan Stanley was off 2%.

"You had a lot of the institutional investors just waiting for an opportunity like this to buy, and the banks knew that," said Jerry Kallas, managing director at Terra Nova Financial, a Chicago brokerage. "They wouldn't have done the offerings if they didn't already know that appetite was out there."

Elsewhere in the financial sector, Bank of America and Citigroup rose sharply, up 2% and 6% respectively. Bank of America needs to raise $34 billion, the largest amount of any of the banks with a capital hole. Citigroup needs to raise $5.5 billion, less than some analysts had feared.

Kent Engelke, managing director at Capitol Securities Management in Glen Allen, Va., said he's holding onto preferred shares he owns in several financial bellwethers, including Citigroup and Bank of America. But he didn't see any reason in the stress-test results to add to his positions or to take on new bets in the banks' common stock.

"The good news here is that we've taken the solvency concerns off the table," said Mr. Engelke. "But I'm still a little concerned about what the government might due later," including possible interference in more day-to-day management decisions at the banks.

Many regional banks that were told to raise more capital were also rising on Friday. Fifth Third Bancorp, which needs $1.1 billion, surged 47%, while Regions Financial, which is facing a $2.5 billion capital gap, was up 7%. SunTrust Banks, which needs to raise $2.2 billion, was up more than 3%.

Treasury bonds rose. The benchmark 10-year note was up 16/32 to yield 3.278%.

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